What is Discretionary Income?
Discretionary income is the amount of your net monthly income minus essential expenses. While disposable income is your gross income minus taxes, discretionary income is your net buying power after you have taken care of your personal necessities. Food, shelter and clothing are essential. Many people have trouble defining what is necessary. Luxury items include anything that is not vital for your survival. In order to account for your discretionary income, it is good to itemize your monthly income and expenses. By paying your bills on a scheduled basis, you will know precisely the amount of your discretionary income. Many people allot for these luxury items and keep a special account for them. Investing and savings belong in the category of discretionary income. Investing in your future should take precedence over spending money on travel, non-essential services and goods. These categories can be itemized according to priority and discretionary income can be allocated accordingly. Spen
: Our policy reads: Total discretionary income is not the same as adjusted gross income (AGI on the federal tax return). It is a total income-calculated by restoring to income tax incentives, such as business losses due to depreciation, subtracted to get the AGI minus such things as taxes actually paid; a standard maintenance allowances for medical expenses, child care and care of student’s grandparents, and other expenses.
This is extra money that’s left over, AFTER all expenses have been paid. Many people don’t realize what their discretionary income actually is, and end up overspending, causing them to not be able to save any money. Once a discretionary income figure is realized, it should not be overspent, if saving money is a goal. To find out what your discretionary income is, you can create a budget using our website.
Most authors imply that it is the income over which the household has discretion in making purchase decisions (Van Arsdale 1982), but because there are degrees of discretion, one author’s definition of discretionary income may be quite different from another’s (Cole 1988). Definitions of debt have similar problems. While standard definitions exist for installment and noninstallment debt, the treatment of debt by government data bases at the macro level has led to inconsistencies when terms are used in developing household analysis (Toal 1986). For example, some definitions include mortgage debt in debt capacity analysis, while others do not (Amling and Droms 1982; Apilado and Morehart 1980; Bailard et al. 1986; Barngrover et al. 1981; Cole 1988; Garman and Forgue 1988; Lang and Gillespie 1981). A related problem is the treatment of installment lease obligations. For practical purposes, at the household level these obligations are very similar to household debt. However, the current lit
